Choosing to file Chapter 7 or Chapter 13 bankruptcy is never an easy decision. In most cases, bills have piled up and credit collectors are virtually harassing debtors who are already under a tremendous amount of stress to begin with. Personal relationships become strained, depression and self-doubt set in and on and on and on. The worst part is that the stress is fueled by the debt and like a fire burning out of control, one does not so much care about how to put it out so much as simply putting it out. Period.
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So with few other options, bankruptcy may seem like an "easy" solution. The calls will stop, the personal relationships will improve because money will not be so tight (well, those relationships usually come under greater strain as it turns out) and the debt will be gone.
The hard part is over, right?
No, not really. The hard part is actually where people try to re-establish themselves with credit. Since credit ratings are damaged irreparably after bankruptcy, finding a lender who will advance a few thousand dollars for car repairs, wedding plans and virtually any other mid-scale purchase is impossible. Of course, there is the secured credit-card option, but those limits are typically lower and while they may help with managing credit, with a bankruptcy on your credit bureau, even secured credit card do little in helping you re-establish the type of credit you need.
What does that mean, exactly?
Well, the credit you need is good credit. The reason for this is that lenders will be (okay, they are) under tremendous pressure to never allow a repeat of the credit crisis that has probably caused a lot of people to look at bankruptcy in the first place. However, to lend more responsibly, these lenders will not only be a lot more restrictive on how much they can lend (due to higher capital ratio requirements coming through), but they will need to properly underwrite their credit products, meaning they will only approve people with the best credit ratings.
Although this does not help the regular people who might have struggled through temporary or permanent job loss or income reduction, it will ensure that the banks are not lending to people who will ultimately have to give up their homes and other assets. The effect will be a stronger, more-tangible economy in the long-term, but getting there will be difficult.
What does this mean for people who could easily seek the advice of a bankruptcy attorney or trustee in 2010? It means this year in particular, people really need to second-guess whether chapter 7 or 13 is the right solution. It means really taking a look at the family budget, including income prospects and seeing whether there is another, even temporary way of sacrificing a little more in terms of expenses and perhaps taking on a second or better job. While it may seem unclear now, the message coming from the lenders and government is quite clear: proper lending is around the corner and outside of capacity to repay, the only other thing lenders can rely on is credit history.
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